With continuing lower oil prices putting pressure on Kuwait’s economy, the one thing that the year gone by has underscored is the urgent need for greater economic diversification and more reduction in government spending.

Despite government promises of cutting spending, costly subsidies in fuel, water and electricity remain and the State continues to pay for specialized medical treatment abroad for its citizens. Another significant drain on the country’s current account is the salaries and allowances, which account for around KD8 billion in Kuwait’s annual budget.

With oil prices looking increasingly unlikely to see a revival in 2016, the government is now determined to rationalize its public sector wages. To this end, the state is introducing a public wage reform initiative that is expected to standardize pay and control the wage bill.

The reforms, dubbed the ‘strategic alternative’, which are awaiting approval from the National Assembly, would see restructuring of job classifications, standardizing of pay structure across the public sector and the introduction of an annual inflation adjustment, among other things.

The measures, if implemented in its original form, will give the government greater centralized control over wage growth and unify pay standards across the public sector. The initiative, which is expected to cost KD370 million in its first year of implementation, will go towards increasing the salaries of employees earning less than the new pay scale. It is estimated that around 45 percent of public sector employees currently earn below the proposed new pay scale. The increase in their salaries is projected to increase consumer spending and give a moderate boost to the country’s retail sector.

Those currently earning above the new pay scale will not see their salaries reduced; instead, their salaries will remain frozen until it equals the pay corresponding to their grade and job classification in the new scale. However, the pay of this group will still be adjusted for inflation.

The government hopes through this initiative to reap substantial savings in the long-term and more importantly to rationalize and increase efficiency in public sector wages. The reforms are expected to bring about fiscal savings of over KD16 billion during the first 10 years of implementation and that, by year 10, the government’s salary bill will be 20 percent lower than if no action were to be taken today.

One of the main objectives of this reform is to reduce disparities in pay and increase transparency. For instance, research has shown that pay at one of government institutions for a ‘Grade 4’ accountant is double of that paid to a ministry employee in the same grade. A major reason for this salary discrepancy is the proliferation of job-specific allowances, which can vary significantly. In addition, there are also inconsistencies in basic pay across the public sector. The research also revealed, not unexpectedly, that, individual performance and productivity did not play any role in explaining differences in employee salaries.

The wide incongruities in compensation exist not only between entities in the public sector but also within them. At some of the entities with the largest proportion of underpaid staff, more than half of employees are expected to receive an increase in salary from the proposed new pay scale. Meanwhile, staff at entities with the lowest proportions of employees earning below the proposed new law will require minor adjustments.

In its effort to rationalize the public sector pay scale, the government will set a unified pay scale and a ‘job allowance’ scale to account for differences between job categories or professions. The new law calls unifying job classifications, based on globally recognized International Standard Classification of Occupations (ISCO) and setting up 15 equivalent grades across the public sector. Each grade would have the same basic salary, and each job category would have its own ‘job allowance’ scale.

Another aim of the ‘strategic alternative’ is to enable the government to manage the unbridled growth in the public sector wage bill, which has averaged around 12 percent annually over the last two decades. The reform initiative is expected to eliminate the exiting haphazard process of salary growth and reduce average wage bill growth to around 9 percent a year, while increasing fairness and transparency.

Once the new law is approved, the Civil Service Council (CSC), which currently manages new hiring across most of the public sector, will be responsible for its implementation and enforcement. A pay review every four years will also be introduced that will allow authorities to make needed adjustments to pay scales to accommodate changes in labor market conditions.

The reforms also aim to encourage and reward high performance and productivity among employees. A recent research showed that existing annual performance review fails to identify and distinguish those who actually perform at their jobs, with 80 percent of the employees receiving the top ‘excellent’ grade.